Monday, August 10, 2015

Uganda raises rate 150 bps to prevent higher inflation

Uganda's central bank raised its benchmark Central Bank Rate (CBR) by another 150 basis points to 16.00 percent, saying it "believes that a tighter monetary policy stance is warranted to forestall risks of higher inflation to ensure that annual core inflation remains in single digits and converges towards the BOU's policy target of 5 percent in the medium term."

The Bank of Uganda (BOU), which has raised its rate by 500 basis points this year following hikes in July, June and April, added it would also increase the band on the CBR by 100 basis points to plus/minus 3 percentage points and the margin on the rediscount rate to 4 percentage points.

This means that the rediscount rate will rise to 20.0 percent and the bank rate to 21.0 percent.

In its previous policy statement from July 13, the BOU said it expected the hike to be sufficient to hold annual core inflation in a range of 8 to 1 percent, but it would also continue to assess the risks to inflation and take appropriate action.

The BOU said its inflation forecast reflects elevated risks to inflation, including the future path of the exchange rate, which will be influenced by external developments and the speed with which the recent depreciation feeds through to higher inflation.

Uganda's headline inflation rate rose to 5.4 percent in July from 4.9 percent in May and June, topping the BOU's target. It added that core inflation in July also rose to 5.4 percent in July, with the rise consumer goods cutting across all subcomponents except for food-crop prices that fell by 3.9 percent.

"The momentum of price increases remained high for services and other goods category reflecting the impact of exchange rate depreciation," the BOU said.

Uganda's shilling has been depreciating since February 2014 but the decline has been accelerating since May, and especially since mid-July, despite central bank support in foreign exchange markets.

Last month the central bank said the exchange rate's volatility was driven more by sentiment than economic fundamentals but added that the pass-through of the depreciation of the shilling was yet to be evident.

Today the shilling was trading at 3534.9 to the U.S. dollar for a depreciation of 22 percent since the beginning of this year.

The outlook for Uganda's economy has not "greatly changed" since July with data pointing to relatively strong growth this year, supported by public investments, faster growth in private sector borrowing and a recovery in the agricultural sectors.

However, the BOU noted that commodity prices have continued to falter and remains a source of uncertainty on exports along with risks from the global economic situation that affect the country's economy.

Uganda's Gross Domestic Product expanded by 0.28 percent in the first quarter of this year from the fourth quarter of 2014 for annual growth of 4.9 percent, down from 7.1 percent in the previous quarter.

The central bank has estimated growth in the 2014/15 financial year, which ended June 30, of 5.0 percent, up from 4.6 percent in 2013/14.